COMMUNITY LIVING.

HUD considers escrow program for assessments

March 04, 2005|By Pamela Dittmer McKuen, Special to the Tribune.

Lenders for federally insured mortgages would be required to put community association assessments in escrow under a new regulation being considered by the U.S. Department of Housing and Urban Development.

If passed, the regulation could be good news for associations, who will be assured of receiving assessment income, and for owners, who won't have to worry about missing payments and risking the consequences of fines, eviction or foreclosure. But some association groups say administering such a program would be challenging.

"The implementation must make good sense in the real world of association living," said Linda Schiff, president of the Community Advantage division of Barrington Bank & Trust Co. in Barrington.

The regulation, proposed in Revisions to the Single Family Mortgage Insurance Program, would apply only to mortgages backed by the Federal Housing Administration on or after the date it would become effective.

Lenders will have to include assessments as part of the monthly mortgage payment and to put the money in escrow until it is due, just as they do now for property taxes and insurance. The document is at www.gpoaccess.gov/fr/.

Further details have yet to be finalized. HUD is reviewing the recommendations expressed during the public comment period ending Jan. 10.

One organization that contributed comments is the Community Association Institute, an advocacy group based in Alexandria, Va. The group generally favors the concept of the escrow program, said senior vice president and general counsel Molly Foley-Healy.

"Assessments are the lifeblood of community associations and are utilized to provide essential services to the residents," she said. "It is critical that every homeowner pay their assessments in a timely manner to ensure continuity in providing these services."

Myriad issues, most of them administrative, must be worked out for an escrow program to be successful, she said.

One concern is that associations receive timely and correct payments. Some associations may charge assessments monthly, quarterly or annually, and they raise assessments in varying amounts.

"Financial institutions must be equipped with obtaining this information on an ongoing basis," she said. "Then there are self-managed associations or associations with limited assets who have to collect mortgage information for all owners and who to contact to give information on assessment increases for the coming year. These are volunteers we are asking to do all these things."

The institute estimates that between 40 percent and 60 percent of associations nationwide are self-managed.

Annual lump-sum payments might streamline the bookkeeping but create other problems. If assessments are delivered at the end of the mortgage year, the association loses cash flow. If the first year's assessments are included in closing costs or added to the loan amount, fewer people would qualify to buy homes that they want, she said.

The institute also wants to see special assessments, which are usually one-time charges levied because of a major repair, excluded from escrow, and for associations to continue to have legal standing to take action against delinquent owners.

"I think it's a good idea because some of these foreclosures won't be happening," said Pat Haruff, president of the Coalition of Home Owners for Rights and Education, a nationwide activist group based in Phoenix. "But it could be a managerial nightmare for HUD and it doesn't address people who have their homes paid for."

The number of association owners who would be affected is small, "but if HUD can implement this so that it is effective, it could be a good first step for other entities to look at," said Foley-Healy.